Europe close to highs after interest rate decision

U.K. shares climb, though gains capped by surprise rate hike

By

SarahTurner

LONDON (MarketWatch) -- European shares closed sharply higher Thursday, pushing up towards six-year highs after the European Central Bank kept interest rates unchanged and indicated a further hike may be delayed until at least March.

A strong start on Wall Street also provided support, though gains in London were less pronounced after the Bank of England surprised markets by raising its key interest rate by 0.25 percentage points to 5.25%.

The U.K. FTSE 100 index (UKX) rose 1.1% at 6,230.10, with the banking sector and home builders putting a cap on gains as investors worried about the ability of consumers to service debt in the light of the rate tightening to 5.25%. See full story.

Exporting technology shares were also performing well in Europe, as the euro weakened, with mobile-phone maker Nokia
NOK, +0.87%
up 2% and chipmaker Infineon Technologies
IFX, -4.44%
(623100) up 2.2%, following a strong performance in the U.S. overnight.

In M&A news, shares in Franco-Spanish tobacco company Altadis (017704001) rose 2.1% following a report that Imperial Tobacco Group is mulling a 10 billion-euro bid ($12.96 billion).

The Business newspaper reported, citing unnamed "City sources," that Imperial had asked its advisers to prepare the ground for a bid and had not yet approached Altadis management. See full story.

Imperial Tobacco (IMT) shares closed 1.4% higher.

Retailers in focus

Of companies updating investors, shares in German retailer Metro Group (725750) rose 1.6% after it said 2006 sales rose 7.5% to around 60 billion euros, helped by sales growth of 1.9% in Germany and international sales growth of 12.4%.

In the fourth quarter, sales rose 10.1% to 18.4 billion euros after very satisfactory Christmas trading in Germany, the company said while also confirming its forecast for 2006 earnings per share growth of between 5% and 8%.

"Metro has reported a solid fourth-quarter sales update," said analysts at Dresdner Kleinwort.

And home-improvement retailer Praktiker (A0F6MD) rose 2.6% after it said sales rose 4.2% to 3.16 billion euros in 2006 and confirmed that it expects earnings before interest and tax to reach 105.8 million euros.

"Praktiker reported weaker than expected fourth-quarter sales with a noticeable slow-down of German comparable sales, but reiterated its yearly guidance, suggesting good margin control," said analysts at Merrill Lynch in a note to clients.

However, U.K. supermarket chain J. Sainsbury (SBRY) wasn't doing as well, trading down 1% after it said that its third-quarter comparable sales rose 4.2%, or 5% excluding fuel.

"We prefer William Morrison (MRW)...believing that the Sainsbury share price has increased too much," said analysts at Societe Generale. "The fact that today's figures do not allow for any upgrades is a major disappointment for the market. Upgrades are the vital oxygen needed to sustain Sainsbury's stratospheric rating. Without this, the shares will carry on down."

The broker said that, after several years of underperformance, it believes that the risk/reward for ABN Amro is now attractive

Also, Deutsche Bank upgraded U.K. broadcaster ITV (ITV) to buy from hold, saying it believes Michael Grade, the new executive chairman, will transform ITV's prospects, and that there remains considerable value in the franchise, as suggested by recent M&A.

ITV shares rose 2.1% in London.

Beer company Heineken (00916) shares rose 2.6% after the company was upgraded to neutral from underweight at J.P. Morgan.

"We expect the stock to rally into the full year results on February 21," said the broker.

At the same time, J.P. Morgan cut Heineken peer InBev (000379310) to neutral from overweight, saying that it can't see a near-term catalyst for further outperformance. Shares dipped 1.9%.

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